Balancing risk with an owner-operator model

What does it mean to be an owner-operator in the context of today’s economic uncertainty? CEO of Fleming’s Hotel Group Filip Blodinger discusses this issue with David in our first episode of the week. He talks about the value of a strong asset portfolio and the difference this makes in reducing complexities with banks and other partners.

Going forward, Filip believes there will be increased focus on the need for financial reserves—whether for individuals, companies, states or governments. He also stresses the importance of a diverse brand portfolio, as he believes different segments of the market will emerge from this crisis at different paces.

TRANSCRIPT

START AUDIO

David Keen 0:09This is David Keen. At QUO, we’ve worked for the last 20 years with many of the world’s best-known travel brands. During this unprecedented global crisis, our world of travel has changed, possibly irreversibly. This series will see us speak with many global leaders to understand how they see the future of travel.

Filip Blodinger 0:50Hi David. It’s a big honour to be here with you. And as I’ve told you already, I’m a big fan of your podcast, so I’m very much looking forward to this.

David Keen 1:03Filip, how… can you share your thoughts, how serious, how devastating is the virus today and in the short to medium term on the German economy?

Filip Blodinger 1:17Well, David, I think this virus is a total disaster—not only for the hospitality and restaurant industry—but especially for our industry. And just a few days ago the Hotel and Restaurant Association, DEHOGA, came out with a survey, which showed that 70% of hotel and restaurant operations are in severe danger of going out of business within the next weeks. So, this alone shows you the situation we’re in.

David Keen 1:54That’s incredible. Filip, how bad is it for commercial real estate?

Filip Blodinger 2:01For commercial real estate, it really depends on your tenant structure. They are… some commercial real estate was hit much harder. Especially for us as being overly exposed in hotel investments, the effect is extreme. Because nobody—really not even the big players—are able to pay rent at the moment. So, yes, it’s not a very comfortable position.

David Keen 2:40I could imagine. Are the banks already seeing defaults within the real estate… in the real estate.. I mean not just in the hotel business. But are there reports of serious damage to the real-estate industry.

Filip Blodinger 2:57You know, the elephant in the room is how long will this shut down, how long will this pandemic be around? So, you know, if it’s over and nobody is really expecting this at the moment, fairly soon. The fact that you mentioned—the defaults, etc. I don’t think we will see a lot of them because people will have enough reserves. And the longer this pandemic and the shutdown is happening, the more those reserves will be depleted, the more pressure on all players will mount, and eventually we will also see defaults.

Filip Blodinger 3:48For us, being a family business. Being. We have always.. we’re very conservative in our business, in our investment approach. And also—I think this is the most important point to make here—we always value long-term relationships over short-term opportunity. And that’s why we were able to negotiate with all our banks, and I also want to take a moment here really to thank all of our bank partners, really. And we managed to come to agreeable terms for 2020. And now when negotiating the future of ’21 and ’22.

David Keen 4:37That’s great. That’s great. Filip, the government has largely—the German government, as well as the Austrian government—has largely globally been applauded by the media for its handling—it’s some, it’s preparation of the crisis, going into the crisis and the management of the crisis. Do you believe that the same success… that the German government will have the same success coming out of the crisis? And how much impact will that have on the immediate future of the economy, and the tourism business or the hotel business?

Filip Blodinger 5:23Well there are two parts to your question really. So the first one is yes, the German government is probably the most active in providing help to individuals and also companies. That just this morning, I read an article where they compared the health packages around the globe, and Germany’s health package amounts to about 35% of GDP, and is the biggest in the world. And so of course this is softening the blow for the moment.

Filip Blodinger 6:03That being said, I think it’s also fair to criticise—and I think this is true to all Western governments—for not reacting earlier. Because we’ve all seen the virus and pandemic develop in China. But we were all a little bit ignorant, and it’s not only the government. It’s also the industries and especially us, I think, in the hospitality industry being such a global—and a globally connected industry—and nobody really saw it coming before, you know, we were in the midst of the storm.

Filip Blodinger 6:43And coming to the second part of your question. Yes, the social effects and the effects for the people will be managed better here, and don’t forget, you know, Europe and Germany has a history of being a social welfare state. And this is helping of course the people, and also the economy.

Filip Blodinger 7:11But let’s be honest: Germany’s economy, Europe’s economy and especially the hospitality industry, we are a very international industries and we depend on the whole world. So, a real end to this pandemic will only… can only be a global ending to what is happening to us.

David Keen 7:34We’ve been talking about the social states, and obviously the impact of the German government on the social status is significant. Do you think that the pandemic… the after, the post-virus will have a positive impact on society in terms of sustainability, in terms of environmentalism, in terms of climate change, in terms of health? How do you feel it will… how do you think it’s going to impact society in Germany?

Filip Blodinger 8:10And you know me David, and I’m a very optimistic person. So, I always try to see the good in everything that’s happening to us so I’m also here. And I’m saying this really very humbly and with all due respect, because I know so many people are severely affected and we should not forget, you know, a lot of people are dying from this. That being said, looking forward as a society, I do believe there’s a fair chance that we will come out a different society, a more sustainable society.

Filip Blodinger 8:52To that point, I’ve read… I’ve come across a great quote of Mark Carney, the former governor of the Bank of England. And he said, “The local resilience will be priced over global efficiency.” And I think this is very, very true. And so economically, I think the value of having reserves on each level will be seen as something valuable again, and as an asset. This is true for individuals, for companies, and for states and governments and as a whole. I think in the last years, our hyper-globalised economy—we’ve become too dependent on this amazingly oiled machine. And now we see that the disruption, with the effect of disruptions.

Filip Blodinger 10:00So, I think, reserves will be put in on really everything. On the whole spectrum. So in the post-corona, I think people would think more carefully, whether it’s maybe worth to spend a few cents more on a mask, but being able to produce them locally or in your region. This is just one example, and also the level of leveraging will be reduced. Because again, I think banks and other market participants will want to see reserves and commitment from investors. So this is again a chance for a company like ours, who has always had a more conservative investment approach. And in the last years, where the aim was always higher and more, it was very difficult for us to find suitable investments. So i think, you know, this can be a chance for players like us.

David Keen 11:10Fleming’s is a significant owner-operator, owning both residential and commercial real estate, and of course owning hotels. Given your position as an owner-operator, given your strength in terms of real estate, which is why I was referring to that before, how much of the benefit is up to you today… how much comfort does it give you having these assets in terms of the current crisis?

Filip Blodinger 11:54I think it’s a tremendous asset to have. But that being said, of course we face the same situation, like every other market participant. But because of our really long and very fair partnerships with our banks and other partners, we were able to find solutions and reduce complexity to a degree. Because if you have a situation where you are the tenant and then you have your landlord, and the landlord has a bank. So you have much more stakeholders to manage, and of course, you know, we could kind of take out the middleman. And as Fleming’s Hotels, you know, and being one organisation with Fleming’s asset management, we could directly go ahead with our banks and with all the other partners to find the solutions.

Filip Blodinger 12:54And also, you know, it’s a big difference if you… if you postpone, for example, amortisation to a later stage in 10/20 years and I think it’s fair if you look at the lifetime of a real estate, it doesn’t really matter you know to pause your amortisation for two or three years to overcome this crisis. This is of course not an option if you only rent, because no landlord will be able to to forgive their rent, and so it will be just… it will be suspended to a future date, but you will have to pay it anyway. So this is a huge advantage. Again, it’s only an advantage for us because we have always managed our loan to values, and we’ve never been overly aggressive in our investment strategy. So I think this is paying off now.

David Keen 13:55Do you think—and it’s easy to say now—that the structure of your assets and of your hotel portfolio is ideal today? And if not, recognising as you said to yourself just now, that we went into the crisis, sort of within a week or two and we’re right in the middle of the storm, and you look at your portfolio, given that the world is probably going to be pretty volatile for the next few years, what is the ideal portfolio in terms of an asset-heavy or asset-light? And how would you… how would you evolve that given also the marking conditions and possibility for acquisition, etc.? It’s a lot of questions.

Filip Blodinger 14:46A lot of questions, yeah. And so, for the first part of your question, I think, you know, in the past we have sometimes been criticised for having too many […] small is asking at the moment because we have, you know, without Fleming’s Express we have a budget brand, and which is, especially the budget brands would benefit from the situation. As well as lifestyle brands, as well as you know the big meeting, and business brands. So, having a diverse portfolio I think helps us. It will help us to come out of this, because the different segments in the market will, you know, will come back at different pace. So, this is a good thing.

Filip Blodinger 15:47Second, being an owner-operator gives us much more flexibility in terms of product design and going to market, so we are currently working on two new products. We were working to bring to market the Flemings Residents, because we believe the extended stay, the residence market, you know, has a much brighter and an earlier uplift than other more traditional hotel brands, or hotel products. And we are currently developing a Fleming’s Hostel brand. Because we strongly believe that the next few years you know price will be king in your product mix, so we are creating this. And of course, you know, being the owner-operator of the real estate, we can put to market those new products much faster. Did that answer your question, or did I miss the second part

David Keen 16:51You missed half of it, but we’ll carry on. Let’s talk about Fleming’s Hotels. In terms of the concept itself, and the perception of the concept by the market will it be called Fleming’s?

Filip Blodinger 17:10This is too early to say. But, you know, I know some good experts. Some of whom I’m speaking to right now, who will consult me on this. No, all jokes aside, it’s — we’re thinking about the product, and really this idea is not even a week old. And we now are designing and thinking of you know how the product could look like and then later about the naming

David Keen 17:38But the critical thing… the critical thing is speed to market at this point, right? I mean, in order to react, you can’t take… we have to get to market quickly.

Filip Blodinger 17:49Oh, for sure. And, and again, I think, being a family business and then being… coming… within our DNA, we are extremely entrepreneurial. So I think it’s, it’s a great advantage you know to have this in our DNA. And we have much less problems than other players in the market to go to market quicker. And you know maybe if only if the product is done 80%, and you know we’ll fix the last 20% as we go. And so if you look at the whole history of our company, we’ve always been extremely entrepreneurial, and then an open funnel of interest, and I’m convinced you know we will show the same ability going to the future.

David Keen 18:39We talked about in the last question, actually, buty one thing about acquisition—obviously the volatility, you talked about 70% of the market possibly falling out. This for an owner-operator such as your family, does it present opportunities? And will you look to the future with more risk or similar risk that you’re taking at the moment?

Filip Blodinger 19:08You know, we all woke up one morning in a different world. So, I think everybody needs to be humble enough to adequately price in risk. So of course, you know, we are also doing this and we are reducing risk at the moment. And we also stopped some projects that we had going. So of course, you know, to a degree yes we are taking… slowing down. But yet, as I said, before you know we are still looking forward and are always scanning for opportunities. But it’s a little bit too early for this at this stage of time, because for me in order to really being able to make substantial investments now—new investments—I need to have a better understanding of how this pandemic will end. And currently, you know, nobody knows. And we all hoping for a faster vaccine, but nobody knows when it will end so at the moment of course we are very cautious.

David Keen 20:26Would you look to asset-light?

Filip Blodinger 20:30For sure this, this will be our preferred… going forward, our in the beginning, our preferred mix for growth. And we always look at the whole portfolio mix. So at the moment we are extremely asset-heavy, and we feel very comfortable that we can add about 30-35% of assets, you know, in the total mix being asset-light. And again I think this is a great opportunity for us at Fleming’s. So in the first stage of when the market’s at some level stabilising, we see an end of this, you know the first part of growth will be through an asset-light strategy. And then later you know when we have an even better understanding of values, of the new financing environment, then we will be taking… the second phase we will add asset-heavy investments again.

David Keen 21:34Filip Blodinger, Chief Executive Officer of the Fleming’s Hotel Group, I just want to thank you for your candour and for your truth on The Future of Travel. And from all of us, we wish you only health and safety, and take a lot of care. Thank you, Filip.

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